BA - Jet2 Stock: Attractive Business With Efficient Growth Ahead

2023-07-21 14:12:00 ET

Summary

• Jet2's FY2023 results show significant growth, with revenues 40% higher than pre-pandemic times, driven by higher capacity and ticket revenues. Profits surged by 48% and even 142% after FX revaluation.
• Jet2's diversification strategy includes selling leisure packages to customers, which now make up nearly 65% of its business. These package deals are high margin and provide some protection against economic downturns.
• The airline is transitioning its fleet to more fuel-efficient Airbus planes, positioning the company for cost-efficient growth.

While there is a significant focus from investors on North American airlines, the European airlines remain significantly underexposed and also lack coverage on Seeking Alpha. Over the past year I have significantly expanded my coverage base and that includes European airlines and defense companies. With this report I am adding a new name to the coverage as I will be covering the financial results for Jet2 ( DRTGF ).

FY2023 Results For Jet2 Show Growth

For airlines and travel, it's not a surprise that year-over-year the results have significantly improved. While many airlines have now reverted to providing year-over-year comparisons rather than still measuring capacity, revenue and profits against pre-pandemic figures even with profitability not fully recovered for many, Jet2 has kept the comparison with pre-pandemic times in and perhaps that comparison shows the significant progress made to transform the business.

Revenues are 40% higher compared to pre-pandemic times and this was driven by 13% higher capacity and higher ticket revenues and ancillary revenues. Profits surged by 48% and even 142% after FX revaluation. Currently, many airlines are looking to diversify their revenue streams and there's good reason to do so especially if the industry returns to a pretty much unconstrained level that could put a damper on revenues as demand growth will first have to offset softening ticket prices before it will add to the top line. Some airlines diversify by having a dedicated cargo operations, others focus on revenues from loyalty programs and co-branding or maintenance activities.

For Jet2 the diversifying element is that it sells leisure packages to customers and that part is becoming more and more prominent in the mix. It was slightly over 50% pre-pandemic and that has now risen to nearly 65%. These package deals are in demand and provide a higher margin opportunity for Jet2. So, we're seeing how Jet2 is appearing as a more diversified business. That's not something that is new since package holidays have been around for years, but we see that the trend is directed upwards and this summer season the package holiday share of the total departing passengers is already hitting 73.5%.

What There Is To Like About Jet2 Stock

The airline industry remains cyclic, so the diversification of revenue stream is welcome and much needed for any airline business. I like the package holidays approach, it has higher input costs due to inflation but it's high margin and it has some form of protection against softening economic times. Package holidays tend to be cheaper for consumers than picking elements of their holidays, so it's attractive during good as well as softer economic times. Furthermore, Jet2 will be transitioning its fleet from current generation Boeing ( BA ) airplanes to next generation airplanes Airbus ( EADSF ) while also upgauging its airplanes from 189 seats to 232 seats in many cases. So, there's a unit cost reduction upcoming next to the fuel burn savings that positions the company to grow in a more cost-efficient way.

The median price target for Jet2 provides nearly 50% upside, and while its dividend yield of less than one percent is not attractive, there are chances for further increases in the future. And I do believe that with 50% upside to the median target, the dividend is not at all a focus point. What investors who want to buy the OTC shares need to keep in mind is that the volumes are rather low, which could provide a challenge to buy and sell at desired prices.

Conclusion: Jet2 Positions Itself For Efficient Growth

The most recent annual results show the strong recovery of Jet2. I wouldn’t say they had any big change in their business driven by the pandemic but they are paving the way for more efficient growth ahead with a fuel efficient fleet and its high margin package holidays product continues to grow making Jet2 an attractive stock to own even when air fares start to weaken.

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